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Copy of Chap004 1.doc
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Copy of Chap004 1.doc-Chapter 04 - Adjustments, Fi...
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Page 63
Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–2
1.
At the end of the most recent year, Prepaid Expenses and Other Current Assets
was $46,412 thousand.
This information is disclosed on the balance sheet.
2.
The company reported $134,084 thousand in deferred rent.
This information is
disclosed on the balance sheet.
3.
Prepaid rent (an asset) represents rent that a company has paid in advance to its
landlords.
If a company also rents property to tenants, deferred rent (a liability)
represents rent that it has collected in advance for which the company has an
obligation to allow a tenant to use the property.
Urban Outfitters reported deferred
rent of $134,084,000 on January 31, 2009.
However, the related note under
Summary of Significant Accounting Policies indicates that Urban Outfitters has
significant leases and records certain related liabilities in that account. This issue is
covered in a more advanced course.
4.
Accrued Liabilities would consist of costs that have been incurred by the end of the
accounting period but which have not yet been paid.
5.
Interest Income is related to the company’s short-term and long-term marketable
securities (investments).
6.
The company’s income statement accounts (revenues, expenses, gains, and
losses) would not have balances on a post-closing trial balance.
These accounts
are temporary accounts that have been closed to Retained Earnings.
7.
Prepaid Expenses is an asset account.
As such, it is a permanent account that
carries its ending balance into the next accounting period.
It is not closed at the end
of the period.
8.
The company reported basic earnings per share of $1.20 for the year ended
January 31, 2009, $0.97 for the year ended January 31, 2008, and $0.71 for the
year ended January 31, 2007.
4-63
Page 64
Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
9.
Year Ended
(dollars in thousands)
1/31/09:
=
=
Sales
$1,834,618
1/31/08:
=
=
Sales
$1,507,724
1/31/07:
=
=
Sales
$1,224,717
Over the past three years, the company’s net profit margin has increased.
For the
year ended January 31, 2009, management appears to be more effective at
controlling costs, generating greater sales, or both.
CP4–3.
1.
American Eagle Outfitters reported an advertising expense of $79.7 million for the
most recent year (Note 2 under Advertising Costs).
Urban Outfitters reported $45.6
million of advertising costs for the year.
(See Note 2 under Advertising).
2.
American Eagle Outfitters
Urban Outfitters
Year
Ended
Advertising
Expense /
Net Sales
Advertising
Expense /
Net Sales
2009
79,700 / 2,988,866
2.7%
45,561 / 1,834,618
2.5%
2008
74,900 / 3,055,419
2.5%
40,828 / 1,507,724
2.7%
2007
64,300 / 2,794,409
2.3%
35,882 / 1,224,717
2.9%
Urban Outfitters incurred the higher percentage in 2007 and 2008, but American
Eagle incurred the higher percentage in 2009.
While both firms increased
advertising expense each year, American Eagle’s has increased as a percentage of
sales while Urban Outfitters’ has decreased as a percentage of sales.
3.
Industry
Average
American Eagle
Outfitters
Urban
Outfitters
Advertising/Sales =
2.39%
2.7%
2.5%
Both American Eagle and Urban Outfitters are spending more on advertising as a
percentage of sales than the average company in the industry.
This might imply
that they are less effective, as they are generating less sales per dollar spent on
advertising.
Another interpretation is that they are better supporting their brand, and
sales will eventually increase as their brands gain value.
4-64
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